What's so wrong with economic inequality?

Cass Sunstein

Thomas Piketty’s improbable best-seller, Capital in the Twenty-First Century, has put the question of econimic inequality into sharp relief. As just about everyone now knows, Piketty contends that over the next century, inequality is likely to grow. In response, he outlines a series of policies designed to reduce wealth at the very top of society, including a progressive income tax and a global wealth tax.

But Piketty says surprisingly little about why economic inequality, as such, is a problem. He places a lot of reliance on his epigraph, which comes from France’s Declaration of the Rights of Man and the Citizen: "Social distinctions may be founded only upon the general good." To say the least, that is a highly controversial proposition. With respect to economic disparities, nothing of the kind can be found in the US Constitution, or the Universal Declaration of Human Rights, or even the International Covenant on Economic, Social and Cultural Rights.

Piketty's prescriptions require a philosophical argument, not an analysis of economic trends. Suppose that in a democratic nation, almost everyone is getting richer, slowly but steadily, and that poverty is disappearing, but that the wealth of the top 1 per cent is growing very rapidly. Is that a serious problem?

To support an affirmative answer, Piketty refers to the work of the great American philosopher John Rawls, who embraced what he called "the difference principle". Rawls argued that economic inequalities are compatible with justice only if they operate to the advantage of the least well-off. In Rawls' view, a society that allows great inequalities would be unjust if those inequalities do not work to the benefit of those at the bottom.

In philosophical circles, however, the difference principle is highly controversial, and many people reject it. Here is an alternative principle, which would allow far more inequality: Ensure that average income in a society is as high as possible while also making adequate provisions for those at the bottom.

Studies find that numerous people in Canada, Poland and the US favour something like this alternative approach, and that they reject Rawls' difference principle. In the same studies, most people do not show much enthusiasm for imposing a ceiling on the rich or for imposing limits on economic inequality as such.

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To see why, imagine that you are given a choice between two societies. In Society A, there is little poverty and the social average is very high, but some people are extraordinarily wealthy - far more so than everyone else. In Society B, there is little poverty and the social average is not very high, and no one is much richer than anyone else. Isn’t Society A better, simply because the average is higher?

It is true that when a few people at the very top have spectacular wealth, democratic nations can run into genuine difficulties. Without campaign finance limits, economic inequality can turn into political inequality, and the wealthiest people might be able to "buy" their preferred policies.

Cornell University economist Robert Frank has emphasised a different point: The lives of the wealthiest members of society can create the frame of reference for the rest of us, potentially creating "expenditure cascades," as people with less money struggle to catch up. There is also a risk that large disparities can have adverse effects on growth and produce a degree of demoralisation - in extreme cases, a degree of civil unrest.

Piketty himself makes a strong argument that if the goal is to create good economic incentives, it is unnecessary for the very wealthiest to be so far ahead of the rest of us. To that extent, a progressive tax that falls most heavily on the wealthy, and that uses those funds to help the disadvantaged and to provide public goods (such as infrastructure), is not difficult to justify.

Fair enough. But if we focus our attention only on the wealthiest members of society, we might get distracted from what should be the more fundamental goal: providing decent opportunities and minimum security for all. When the 20th century's greatest American president, Franklin Delano Roosevelt, summarised his years in office, he did not rail against inequality. He argued instead for a Second Bill of Rights, which was, in his words, based on "a clear realisation of the fact that true individual freedom cannot exist without economic security and independence."

To provide that security, Roosevelt called for recognition of the right to a good education; the right to a useful and remunerative job; the right to earn enough to provide adequate food and clothing; the right to a decent home; the right to adequate medical care; and the right to adequate protection from the economic fears of old age, sickness, accident and unemployment.

Most people do not show much enthusiasm for imposing a ceiling on the rich or for imposing limits on economic inequality as such.

To build a just society for the 21st century, Roosevelt's Second Bill of Rights, and not Piketty's prescriptions, is the best place to start. Our focus should not be on the spectacular incomes of those at the top, and not even on economic inequality as such, but instead on providing a foundation for individual freedom: economic security and independence for all.

Cass R. Sunstein, is former administrator of the White House Office of Information and Regulatory Affairs, a professor at Harvard Law School and a Bloomberg View columnist.